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How safe is your IRA? Not from the markets, but from the State!

I discussed how inheritances can go amuck and the heirs don’t get the inheritance – the State does. This can happen while you’re still alive too! Did you know that the State can claim your IRA (or any account for that matter) due to inactivity?

State Escheatment laws kick in when property is unclaimed or abandoned. The SEC explains escheatment on their site. States have adopted more aggressive due to the financial crisis in the late 2000’s since the property can be used for State budgets. There are time periods for when property is considered abandoned and goes to the State, and time periods when the property is sold to go into State funds.

Even when you are receiving statements or other correspondence FROM the financial institution the property can escheat to the State because YOU did not contact the institution (as required by your State laws)!

State laws may require that you contact your financial institutions at least once every three years to avoid having the state deem your property abandoned

Even if you have automated features on your account (such as automatic deposits or withdrawals, or the automatic reinvestment of dividends), you still must contact your financial institution(s). In the view of many states, such automated features do not constitute contact, allowing these states to deem your account abandoned.

What should you say when contacting your fund company or financial institution to establish contact? There are no “magic” words you have to recite to protect your account—but you must talk to a representative. Calling an automated phone line may not suffice! You might just say, for example, “I’m calling to maintain contact regarding my account(s),” or “I’m calling to make sure you have my correct address.” The important thing is that you talk to a live human being regarding your account. By speaking to a representative, the mutual fund company will be able to document that you contacted them about your account(s).

Be sure to contact each financial institution holding your property, including property that does not involve mutual fund shares (such as bank accounts or brokerage accounts).

And if you have multiple accounts at one financial institution (for example, an account in your name as well as a joint account with your spouse), make sure you let the institution know, so they can establish contact for each of your accounts.

If you’re not sure whom to contact, look at a recent statement you received regarding your account. It should have the name and contact information on the firm holding your account.

So what is inactivity?

Some articles suggest that logging into your account online once a year may be deemed contact. Other articles, such as the ICI site linked to above suggest calling. Escheat laws vary by State since each do not interpret unclaimed property in the same way. Here’s a site where you may some information on each State.

Okay … you may be thinking just how can somebody lose track of their property or accounts?

It becomes easier than you think today for two reasons.

Paperless statements and automatic contributions or distributions. Both of these conspire to losing track, and then not contacting the financial institution as required by the State you live in results in escheatment.

Diminished financial capacity as we age. Even getting statements doesn’t help, in this case, since the person doesn’t make financial institution contact due to forgetfulness or the need simply not being part of a longer term routine. Simply put, this is not on their mind.

Either or both of these have put a lot of money into State budgets.

Both of these also become problems for heirs to know what you have because they work together by no paper statements and the owner simply not remembering what they own. But, I’ll point out, this happens to many younger people too since they too are out of the habit of thinking about accounts without paper reminders, AND not knowing what the State requires of them in this area. And if something happens prematurely while younger – without something documenting what you own, because of paperless online setups, how does anybody else know what you owned to pass it on as you wish (this is where escheatment happens – the property and accounts have been deemed to be abandoned). AND again, I’ll remind you, this can happen while you’re alive too since you don’t have something to remind you what you have, and remind you of the requirement to notify the institution as required by your State’s law.

If receiving statements on accounts suddenly stop, electronically or paper, that’s a hint. If you don’t keep good records (statements) so your heirs can find your accounts, that’s a problem.

Information is provided 'as is' and solely for informational purposes, not for investment purposes or advice.BrightScope is not a fiduciary under ERISA. BrightScope is not endorsed by or affiliated with FINRA.